Report Finds Private Pension System Stable

“The Rising Tide of Pension Contributions Post-2008: How Much and When?” found the recession and equity market downturn, combined with low interest rates that drive up the cost of providing defined benefit pensions, have put stress on the private pension plan system. In particular, the research shows that aggregate contribution levels are sensitive to the effects of stock market returns due to significant exposure to equity investments in the system.

According to the report, employers contributed an average of $70 billion per year over the five years ending in 2009. Required contributions are expected to average $90 billion per year between 2010 and 2020, reaching a peak level of $140 billion in 2016.

While challenges remain for many plan sponsors, system-wide these challenges should not be considered insurmountable, according to Joseph Silvestri, FSA, Retirement Research Actuary with the SOA and lead researcher of the report.

“The data shows that employers, on average, have been contributing well in excess of the minimum requirements for the last several years,” Silvestri said. “While the system as a whole is successfully navigating the rising tide of minimum required contributions, there will be individual employers for whom the pension plan funding requirements pose a greater short-term challenge.”

Silvestri says defined benefit sponsors may consider revising funding choices to sustain their pension plans moving forward, if they have not done so already. Potential strategies may include adopting a contribution policy that “smoothes” actual pension contributions regardless of market performance. For those that carry equity risk, strategies may include adjusting asset portfolios to reduce the effects of market volatility and declining interest rates.

“There is an opportunity to realign the pension regulatory structure to reduce sensitivity to economic cycles, and to make private pension plan benefits more secure for employees and retirees,” observed Society of Actuaries President Donald J. Segal, FSA.

Options could include linking minimum required contributions to the sponsor’s equity portfolio risk, credit rating, plan maturity or a contribution thereof, and changing minimum funding requirements to make them less sensitive to interest rates and equity market fluctuations.

“The results of this research pose interesting questions for both sponsors and policymakers with regard to improving risk management and making the pension system stronger,” Segal added. “While more research is needed to understand ways to accomplish counter-cyclical funding, sponsors can take action now by reviewing their funding choices to help mitigate the future volatility of minimum required contributions.”

To read the full report, “The Rising Tide of Pension Contributions Post-2008: How Much and When?” visit http://www.soa.org/files/pdf/research-2011-10-rising-tide-report.pdf.